(Bloomberg) — Wall Street’s enthusiasm faded in the final part of a solid quarter for stocks that saw the market hit multiple record highs.
Most read from Bloomberg
The S&P 500 was little changed after gaining nearly 1% earlier on Friday. The Nasdaq 100 also lost steam after briefly topping 20,000 amid volatility in big tech companies. Treasury yields rose, reversing a decline that immediately followed inflation data that bolstered bets on Federal Reserve rate cuts. Traders kept a close eye on news of the US presidential race but remained cautious ahead of Sunday’s elections in France.
JPMorgan Chase & Co.’s Marko Kolanovic said the S&P 500 will be reeling in the coming months from mounting headwinds, from a slowing economy to downward earnings revisions. The index is poised to fall to 4,200 by year-end, a decline of about 23% from Thursday’s close, he said.
“There is a clear disconnect between the massive rise in U.S. equity valuations and the business cycle,” the strategist wrote, adding that the S&P 500’s 15% gain this year is not justified given declining growth projections.
The S&P 500 fluctuated after briefly hitting 5,500 earlier Friday. Nvidia Corp. swung between gains and losses. Nike Inc. fell 20% on a disappointing outlook. The 10-year Treasury yield rose six basis points to 4.35%.
Stocks are entering the second half having risen about 15% this year. Historically, a strong first half is often followed by above-average returns in the second half, says Adam Turnquist of LPL Financial.
“While high valuations, overbought conditions and disappointing market breadth point to a possible lull ahead, seasonal trends suggest momentum could continue into the second half,” he noted.
The S&P 500 has followed positive first-half returns with an average second-half gain of 6%, Turnquist added. Furthermore, when gains in the first half were 10% or higher, the index averaged gains of 7.7% in the second half, with 83% of events delivering positive results.
According to Scott Rubner of Goldman Sachs Group Inc. the US presidential election and its aftermath promise investors major market swings in the second half of the year.
The director and tactical specialist of the global markets division was rightly optimistic about US equities in May and June, but after July 17 he predicts a correction in the stock market. This usually means a decline of around 10% for equities.
“I want to limit exposure here after the 4th of July,” Rubner wrote in a letter to clients on Friday.
Earlier in the session, traders kept a close eye on economic data.
U.S. consumer confidence fell less than initially estimated on expectations that inflationary pressures will ease. The Fed’s preferred measure of underlying U.S. inflation slowed. Household spending recovered and incomes grew solidly, offering some hope that price pressures can be tamed without lasting harm to consumers.
“From a market perspective, today’s PCE report was almost perfect,” said David Donabedian of CIBC Private Wealth US. “The Fed’s favorite inflation indicator showed not only that inflation was moving toward the Fed’s inflation target, but also that the economy is resilient. Consumer spending was up and net income was also up after a slow few months. “
According to Mohamed El-Erian, the decline in inflation, which the Fed favors, points to a slowing economy that increases the risk of a policy error by the central bank.
“The economy is slowing faster than most economists expect and faster than the Fed expected,” El-Erian, the president of Queens’ College, Cambridge and Bloomberg Opinion columnist, told Bloomberg Television on Friday.
Seema Shah of Principal Asset Management believes that while the inflation numbers come as a relief and will be welcomed by the Fed, the policy path is not yet certain.
“A further slowing in inflation, ideally coupled with additional evidence of a weakening labour market, will be needed to pave the way for a first rate cut in September,” she noted.
Mary Daly, president of the San Francisco Fed, told CNBC that the latest inflation data suggests monetary policy is working, but said it’s too early to say when it will be appropriate to cut borrowing costs. Earlier Friday, her Richmond counterpart Thomas Barkin said the battle against inflation is not yet won and that the U.S. economy is likely to remain resilient as long as unemployment remains low and asset valuations remain high.
“The soft inflation numbers will strengthen the argument that the Fed can cut rates in the coming months,” said Jeffrey Roach of LPL Financial. “As long as incomes are growing at a healthy pace, consumers will continue to spend. The key is the labor market, so we should now turn our attention to next week’s nonfarm payrolls release for a fresh look at the labor market.”
According to Joe Kalish of Ned Davis Research, the timing of the first rate cut is important because bonds rise in anticipation of that cut.
“Any bond market outlook for the second half is dependent on Fed policy,” he said. “The timing of the first rate cut has historically been important for the bond market, as rates typically peak two to three months before the first rate cut.”
Company Highlights:
-
Uber Technologies Inc. and Lyft Inc. have agreed to a series of employee benefits to resolve a long-running lawsuit in Massachusetts challenging the employment status of drivers as self-employed. This ends the companies’ attempt to put the issue to the vote in November.
-
Microsoft Corp.’s $13 billion investment in OpenAI Inc. will come under increased scrutiny from the European Union’s antitrust watchdogs, who are poised to question rivals over the AI company’s exclusive use of Microsoft’s cloud technology.
-
Nokia Oyj has agreed to acquire Infinera Corp. in a deal valued at $2.3 billion that will expand the company’s data center networking products and boost its presence in the U.S., a potentially key source of growth as the artificial intelligence boom drives demand for server capacity.
Some of the major moves in the markets:
Shares
-
The S&P 500 was little changed at 1:44 p.m. New York time
-
The Nasdaq 100 barely changed
-
The Dow Jones Industrial Average fell 0.1%
-
The MSCI World Index was barely changed
Currencies
-
The Bloomberg Dollar Spot Index fell 0.2%
-
The euro rose 0.1% to $1.0715
-
The British pound was little changed at $1.2641
-
The Japanese yen was little changed at 160.87 per dollar
Cryptocurrency
-
Bitcoin fell 1% to $60,784.77
-
Ether fell 1.6% to $3,383.57
Bonds
-
The yield on 10-year government bonds rose six basis points to 4.35%
-
The German 10-year yield rose by five basis points to 2.50%
-
The UK 10-year yield rose four basis points to 4.17%
Raw materials
This story was produced with the help of Bloomberg Automation.
Most read from Bloomberg Businessweek
©2024 BloombergLP
